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US Economy
MILTON EZRATI is chief economist for Vested, a contributing editor at The National Interest, and author of “Thirty Tomorrows” and “Bite-Sized Investing.” Milton Ezrati
A Look Back, a Look Forward
The frustrations of 2022 should find some resolution in 2023
‘T is the season for articles that look back at the past year and forward to the next. For this look, it seems as though an extremely ambiguous and consequently frustrating 2022 will give way to a greater resolution in 2023.
Last year’s economy certainly created frustration. Take the path of inflation.
It was severe and persistent enough to convince Washington to dispense with the 2021 nonsense that the price pressures were merely “transitory.” But a lingering and misplaced impulse to blame everything on Vladimir Putin kept alive an unrealistic hope that inflationary pressures would dissipate on their own.
The economy looked weak enough to raise widespread concerns of a recession but not so weak that policy postures changed, either in the White House or
Congress. Federal Reserve policy, which started 2022 with an air of insouciance, then suddenly became harshly anti-inflationary in the middle of the year, ended 2022 with talk of moderation.
Without a doubt, the new year will carry its own frustrations and ambiguities. But—for good or ill—last year’s ambiguities should receive clarity.
Here’s how each will likely play out over the next 12 months.
Inflation
Inflation will remain persistent enough to at last erase the last vestiges of optimism—perhaps even enough to penetrate the White House. All the distracting talk of inflation being “transitory” or that price pressures will ease on their own accord will disappear. A consensus should form that matters require strong and consistent policy measures, especially from the Fed.
Actual inflation measures may fall short of the 9 percent 12-month price hike recorded for the consumer price index (CPI) last June—they already have—but rates of increase—probably in the 5 to 7 percent range—will persist and be widely recognized as unacceptable. They’ll certainly remain above the Fed’s inflation target of 2 percent. Even as monetary policy rises to the challenge, the danger is that inflation’s persistence will create expectations that it will continue—a state of affairs that could prolong the price pressure and blunt the effects of anti-inflationary monetary actions.
Federal Reserve Policy
Because of this inflationary reality, the Fed should continue to raise interest rates and restrict money flows that are the root cause of inflation. As interest rates rise to higher levels, policymakers should moderate the pace at which they increase them, less because they believe they’ve done enough but rather because, as Fed Chairman Jerome Powell recently explained, they’ll make allowances for the lagged effects of what they’ve already done.
However fast Fed policy moves, history makes clear that it can’t effectively blunt price pressures until interest rates rise to or above the ongoing inflation rate. With inflation in the 5 to 7 percent range, that’s considerably above where interest rates are now.
Economy
The economy couldn’t help but feel a recessionary effect from this type of monetary policy. Economic activity has already weakened appreciably. Some aspects of the economy continue to show strength, most notably consumer spending and hiring. But both are showing much smaller gains than six or 12 months ago.
Hiring could change abruptly since job creation tends to lag the pace of overall economic activity, both when it turns down and when it turns up. If the economy has already entered a recession, it will extend into 2023 and become more definite. If it hasn’t yet entered a recession, it will likely do so in 2023. The good news is that the recessionary adjustment will likely run its course before the new year ends so that by the second half of 2023, clear signs of recovery will begin to emerge. This recovery’s strength will fall far short of the unprecedented pace that typified the rebound from COVID-19 lockdowns, but it will be a recovery, nonetheless.
Fiscal Policy
Fiscal policy should remain unresponsive throughout. A standoff between the Republican-controlled House of Representatives and the Democratic-controlled White House will likely stymie any response to either recession or inflation. Such an impasse might lift if either problem goes to extremes, but nothing on the horizon suggests that extremes will develop. It may be just as well.
Should Washington act against inflation, and certainly if it acts against recession, the effect of such policies would almost certainly reach full force only after the economy has finished adjusting. They would consequently create more distortions than anything else.
This isn’t an especially exciting outlook, but neither is it frightening. It should be welcome because it will resolve some of the uncertainties of the past year, and a definite picture of economic conditions and prospects can offer a good groundwork for healing and recovery. Politics and geopolitics should remain as frustrating and impenetrable as ever.
EMEL AKAN is a senior reporter for The Epoch Times in Washington. Previously, she worked in the financial sector as an investment banker at JPMorgan. Emel Akan
Businesses ‘Extremely Cautious’ in 2023
Spending cuts and tight household budgets worry corporate leaders
The question of whether the U.S. economy is in recession remains one of the most hotly debated topics of 2022, yet corporate America is bracing for a slump in consumer spending. As high inflation depresses consumer demand, businesses of all sizes expect the economy to worsen in 2023.
Consumer spending has kept the U.S. economy afloat over the past year, but it’s unclear whether this pace of spending will be sustained in the coming year as household budgets become further stressed.
Bank deposits have fallen by $340 billion since their peak in April, indicating a weakening savings buffer. The personal savings rate as a share of disposable income fell to a 17-year low of 2.3 percent in October. And consumers are increasingly turning to credit cards to make ends meet in the face of rising prices.
With household budgets squeezed and Americans signaling future spending cuts, business leaders are worried about a dip in revenues and the need to lay off personnel.
The profit outlook for S&P 500 companies also reflects the economic weakness ahead. Analysts now expect fourth-quarter earnings to fall by 2.8 percent, according to FactSet. This would be the first drop since the third quarter of 2020, when the COVID-19 pandemic was at its peak. In the past five years, the average profit growth of S&P 500 companies was 14.3 percent.
“If a recession is coming in 2023, it will be the most widely anticipated recession of all time,” Ed Yardeni, president of Yardeni Research, said, noting that some of the most vocal pessimists are bankers. “It would be the first time that we’ve collectively talked ourselves into a recession.”
Executives of the largest U.S. banks are warning that rising prices would dampen consumer spending, which makes up roughly 70 percent of the U.S. gross domestic product.
“Economic growth is slowing,” Goldman Sachs CEO David Solomon said on Dec. 6 at a conference hosted by the investment bank. “When I talk to our clients, they sound extremely cautious.”
Goldman Sachs is reportedly planning to lay off thousands of staff, as it prepares for an unpredictable economic environment in the new year. It will be the latest big bank to cut jobs due to a sluggish economy and Wall Street activity.
Many executives, including the CEOs of JPMorgan, GM, Walmart, United, and Union Pacific, are also preparing for a slowdown in consumer spending and business activity. Among the challenges they mention are rising interest rates, inflation, geopolitical tensions, and stressed supply chains.
“It could be a hurricane. We simply don’t know,” JPMorgan Chase CEO Jamie Dimon told CNBC.
Main Street is also expecting choppy waters in 2023, particularly owing to high inflation and tightening credit conditions.
Nearly 40 percent of small business owners believe the U.S. economy will enter a recession in 2023, up from 26 percent in the third quarter, according to the latest CNBC–SurveyMonkey survey. Most respondents anticipate the recession to begin in the first half of next year.
Following its final policy meeting of the year on Dec. 14, the Federal Reserve put financial markets on notice that officials were nearly unanimous in their assessment that interest rates needed to rise further and remain at high levels for longer to fight inflation.
Former Treasury Secretary Larry Summers believes that the Fed is making the right call this time to focus on lowering inflation despite increasing concerns about an economic recession.
According to Summers, one of the problems is that salaries are still catching up with inflation and labor markets remain extraordinarily tight.
There’s no reason to believe that inflation is under control “until wage inflation declines significantly or we get clear evidence of a productivity acceleration,” Summers wrote in a recent Washington Post op-ed.
“Unfortunately, all major reductions in inflation in the past 70 years have been associated with recessions. It should come as no surprise that many economists, including me, expect a recession to begin in 2023.”
DANIEL LACALLE is chief economist at hedge fund Tressis and author of “Freedom or Equality,” “Escape from the Central Bank Trap,” and “Life in the Financial Markets.” Daniel Lacalle
Cap on Russian Oil Subsidizes China
There are many mistakes in the G-7 agreement to put a cap on Russian oil. The first one is that it doesn’t hurt Russia at all. The agreed cap, at $60 per barrel, is higher than the current Urals price, above the five-year average of the quoted price, and higher than Rosneft’s average netback price.
According to Reuters, “The G-7 price cap will allow non-EU countries to continue importing seaborne Russian crude oil, but it will prohibit shipping, insurance, and reinsurance companies from handling cargoes of Russian crude around the globe, unless it is sold for less than the price cap.”
This means that China will be able to purchase more Russian oil at a large discount, while the Russian state-owned oil giant will continue to make a very healthy 16 percent return on average capital employed and more than 8.8 billion rubles ($141 million) in revenues, which means earnings before interest, taxes, depreciation, and amortization that more than doubles its capital expenditure requirements.
This misguided cap is not only a subsidy to China and a price that still makes Rosneft enormously profitable and able to pay billions to the Russian state in taxes; it’s also a big mistake if we want to see lower oil prices.
With this cap, the G-7 has created an unnecessary and artificial bottom to old prices. The G-7 didn’t want to understand why oil prices have roundtripped in 2022: that is, competition and demand reaction. By implementing a $60-per-barrel cap, which is a bottom price, the G-7 has made it almost impossible for prices to reach a true bottom if a demand crisis arrives. On the one hand, the G-7 has taken 4.5 million barrels per day, the estimated Russian oil exports for 2023, out of the supply picture with a minimum—and maximum—price, but has additionally made OPEC keener on cutting supply and raising their exports’ average realized oil price higher.
China must be exceedingly happy. The Asian giant will secure a long-term supply at an attractive price from Russia and sell refined products globally at higher margins. Sinopec and PetroChina will find enough opportunities in the global market to secure better margins for their refined products while guaranteeing affordable supply in a challenging economic situation.
When I read this news about “price caps,” I wonder if bureaucrats have ever worked in a global competitive industry. They may not have, but they certainly employ thousands of “experts” that may have told them that this is a clever idea. It’s rubbish.
If the G-7 really wanted to hurt Russia’s finances and exports, the way to do it is to encourage higher investment in alternative and more competitive sources. However, what’s happening is the opposite. G-7 governments continue to impose barriers to investment in energy, as well as regulatory and wrongly called environmental burdens that make it even more difficult to guarantee diversification and security of supply.
What killed the oil crisis of the ’70s was the phenomenal rise of investment in other productive areas. What has allowed oil prices to do an almost 180-degree year-to-date move is higher supply, non-OPEC competition, and demand response.
The energy sector already suffers from concerning levels of underinvestment. According to Morgan Stanley, oil and gas underinvestment has reached $600 billion per annum. With this so-called price cap, the incentive for producers to sell what they can and invest as little as possible is even higher, and this may imply much higher oil prices in the future. China and Russia also know that renewables and other alternatives are nowhere close to being a widely available alternative and that, anyhow, this would require trillions of dollars of investment in the mining of copper, cobalt, and rare earths.
By adding a so-called cap on Russian oil prices to the increasing barriers to developing domestic resources, the G-7 may be planting the seeds of a commodity super-cycle where dependence on OPEC and Russia increases, instead of decreasing.
I repeat what I’ve been saying for months: The developed economies’ governments are taking their countries from a modest dependence on Russia to a massive dependence on China and Russia.
